Understanding

the Capital Markets

Limit Order
Hedge
Exchange Traded Fund
Derivatives
1
Capital markets bring together companies looking for money with
investors who have money to invest. Companies need money to
grow, buy equipment, build facilities, hire workers, and fund research
and development. To access this public capital, companies can raise
money by going public.
Going public refers to the process by which companies make their
stock or shares available to the public. In doing so, a company sells
partial ownership of its business to each investor, or shareholder.
This method of raising money is called equity nancing. There are
other ways that companies can raise capital, such as selling debt
through bonds and related securities.
Investors may be individuals (often called retail investors) or nancial
institutions such as banks and mutual and pension funds (usually
referred to as institutional investors). The markets that facilitate the
transfer of funds are known as capital markets. Organizations such
as Toronto Stock Exchange, TSX Venture Exchange, Montreal
Exchange and the Winnipeg Commodity Exchange are part of the
Canadian capital markets. Over-the-Counter (OTC) trading and
Alternative Trading Systems (ATSs) also play a role in capital markets.
Contents
1 Capital Markets
4 Investing
11 Trading
17 Investor Protection
20 Glossary
23 About the Sponsors
What are
Capital Markets?
Understanding theCapital Markets
3 2
The Primary Market: Initial Public Offering (IPO)
An IPO refers to the rst issue of shares a company makes available to the general
public. It is a one-time transaction between a company and its shareholders. When
a Canadian company decides to sell shares to the public in order to raise capital,
otherwise known as listing, it rst solicits the help of an investment dealer. The
investment dealer advises the company on the number of shares to offer and at
what price, and assists the company in promoting the share. This sale of new
shares takes place in what is called the Primary Market.
Companies that want to list their shares on an exchange must meet stringent
nancial, public distribution and management standards set by the exchange.
After these standards are met, companies are listed on the exchange and
shares are available to the general public.
The Secondary Market
After a company launches its IPO, shares are bought and sold in
what is called the Secondary Market. In Canada, senior equities
trade on Toronto Stock Exchange, while junior equities trade on
TSX Venture Exchange. Unlisted shares are traded Over-the-
Counter, in a dealer market. It is in these markets that investors
may buy and sell shares.
The price of securities trading in the Secondary Market may
uctuate for a number of reasons. For example, if the supply of a
stock is greater than the demand from investors, the market price
for that stock will likely drop. Financial news and world events can
also affect the prices of shares and the secondary market as a
whole. Trading and market information such as volume, opening
and closing prices, bid and ask spreads and intra-day high and low
prices are regularly reported in the print and electronic media.
Bond Market
Bonds are not traded on an exchange, but sold through
investment dealers in an OTC environment, such as CanDeal.
The Canadian secondary debt market is comprised of
government and corporate debt issues with maturities ranging
from one year to perpetuity, although those starting with
maturities of more than 20 years are not common. Issues
that have remaining terms of more than 12 years are usually
considered to form the long-term market.
Derivatives
Derivatives are nancial instruments whose value is a function of
the price of another asset. In Canada, the Montreal Exchange,
Canadas oldest exchange, facilitates all equity, index and interest
rate based derivatives trading, while the Winnipeg Commodity
Exchange facilitates all of the agricultural futures and options
trading. Both offer individual and institutional investors a wide
range of derivative products.
How Capital
Markets Work
The transfer of capital from investors to companies is an integral part
of the Canadian economy. As a result of this transfer, businesses can
grow and create jobs. At the same time, both retail and institutional
investors can benet from investing, whether they do so directly in
securities such as stocks, bonds, mutual funds, ETFs (exchange
traded funds) or trust units, or indirectly, through money market
funds or derivative products such as equity options.
5 4
While securities may vary with risk and return, all securities
fall under these main categories:
Equities
Debt Securities
Investment Funds
Exchange Traded Funds (ETFs)
Units and Trusts
Rights and Warrants
Derivatives
Common and preferred shares, the two main types of equities, represent
partial ownership of a company. The key difference between the two is in
the holders privileges. Common shares generally carry voting rights,
whereas preferred shares entitle holders to dividends but not necessarily
voting rights. In the event of bankruptcy, preferred shareholders have a
claim to company assets ahead of common shareholders.
Most equities can be bought on margin and sold short. Margin refers to
credit extended to the investor by the investment dealer with whom they
invest. Short selling occurs when investors sell securities they do not own.
A short seller believes the price of the security will drop, with the intention
to buy it back at a lower price.
Types of Common Shares
Common shares are generally classied in one of three ways:
Blue Chip Shares are usually issued by large, well-established
companies. They are considered high quality and typically low-risk,
and often have a record of continuous dividend payments.
Growth Shares are normally considered more risky than blue chip
shares. They typically have the potential for capital gains rather than
income, usually do not pay dividends, and are issued by companies
generally considered to have potential for protability and rapid
growth.
Penny Shares present a much higher degree of risk than blue chip
or growth shares, but the returns can often be signicant if the
company becomes successful. They are often issued by newly formed
companies and are characterized by lower-priced shares that usually
trade for under $1. Only in rare cases do penny shares offer dividends.
Most equities are traded on a stock exchange. In Canada, all equities
trade on Toronto Stock Exchange, TSX Venture Exchange, or Over-the-
Counter (OTC).
Equities
6 7
Exchange Traded Funds, commonly known as ETFs, allow an investor
to buy an entire basket of stocks through a single security that tracks and
matches the returns of a stock market index. ETFs are considered to be a
special type of index mutual fund, but they are listed on an exchange and
trade like a stock. ETFs typically have lower costs than conventional
mutual funds and are generally more tax efcient. ETFs are priced
intraday, and can be bought on margin and sold short.
Limited partnership units represent ownership in a partnership between
a manager and those with investment capital. Liability is limited to the
amount of money invested, should the company go bankrupt.
Trust units represent equity investments in the net assets and net income
of operating businesses. These securities are generally set up to invest in
assets such as real property, royalties or income.
Limited Partnership Units and Trust Units may list on a stock exchange.
As the name suggests, rights provide the common shareholder with the
right to buy additional shares at a specied price for a specied time.
Warrants also provide the holder with the same right. Rights generally
have a shorter time to expiry, whereas warrants are usually issued along
with a new issue, serving as an incentive to invest in the issuing company.
Mutual funds are the most common type of investment fund.
When you invest in a mutual fund, you are essentially pooling your
money with that of other investors. A professional money manager
uses that money to buy many different securities. These securities
form the mutual funds investment portfolio. As an investor, you
are a part owner of this basket of securities.
Mutual funds can be open ended, with shares being bought and
sold continuously, or closed-ended, meaning only a nite amount
of shares are issued, and shares are not issued and redeemed on
an ongoing basis. Closed-ended funds may trade on an
exchange.
Segregated funds, offered by mutual fund and life insurance
companies, are similar to mutual funds but offer a limited
guarantee, often protecting part of the original investment.
Labour-sponsored funds are a type of investment fund structured
similarly to a mutual fund, but with a specic mandate to invest in
small- and medium-sized Canadian businesses. To encourage this
mandate, both the federal and provincial governments offer tax
credits to investors who invest in these funds. Like segregated
funds, labour-sponsored funds do not trade on an exchange.
Debt Securities
Investment Funds
The most common form of debt securities are bonds. Bonds represent
a loan of funds by the investor to an organization seeking capital, usually
corporations or the government. By purchasing bonds, an investor becomes
a creditor to the bond issuer. Holders of debt securities have a higher claim
on assets than that of shareholders. The bondholder, however, does not
share in the prots if a company does wellhe or she is entitled only to the
principal plus interest. When purchasing a bond, the interest rate, sometimes
known as the coupon rate, is always specied along with the term to
maturity.
Similar to bonds, debentures represent a non-secured claim to the assets
of a company, and therefore are more risky. Some debentures trade on
Toronto Stock Exchange.
Treasury bills (T-bills) are debt securities issued by the federal government
and some provincial governments. T-bills generally have a time to maturity
of less than one year, and are bought and sold by investment dealers and
banks.
Guaranteed Investment Certicates (GICs) are deposit securities generally
issued by nancial institutions and usually pay xed rates of return, although
returns can be based on a benchmark, such as the S&P/TSX 60 Index.
Exchange
Traded Funds (ETFs)
Units and Trusts
Rights and Warrants
9 8
As the name implies, derivative contracts derive their value from the
performance of an underlying security. In their most basic form, a
derivative contract represents the right to buy or sell a security at a
specied price. Derivatives are generally used as a hedging tool to guard
against market uctuations.
The features of derivative contracts, such as size, purchase or sale price
and expiry date, are all predetermined. In Canada, all derivative contracts
trade on the Montreal Exchange, Winnipeg Commodity Exchange or Over-
the-Counter.
Two common types of derivatives are:
Futures A futures contract is an agreement to buy or sell an underlying
asset in the future, at a pre-determined price. The buyer in this transaction
is obliged to take delivery of a specic quantity of an underlying asset
at a specic date and price determined at the time of the transaction.
Conversely, the seller agrees to deliver a specic quantity of an
underlying asset at a specic date and price determined at the
time of the transaction.
Options An option contract is an agreement between two parties for a
specied time period (up to the expiry date), which gives the holder the
right, but not the obligation, to buy or sell a specied number of shares,
at a pre-determined price (the exercise or strike price). Options can be
bought and sold just like shares.
There are two types of options:
Call A call option gives its holder the right, but not the obligation,
to purchase a specic quantity of an underlying asset, at a given price
(strike price) for a specied time period (expiration date). In order to
obtain that right, the holder must pay a premium to the seller. The writer
(the seller of the call option) has the obligation to sell a specic quantity
of an underlying asset (such as shares in a company, for example) at
the strike price indicated, if the holder exercises his right. Against this
obligation, the writer receives the premium paid by the buyer.
Put A put option gives the holder the right, but not the obligation, to
sell a specic quantity of an underlying asset, at a given price (strike
price), by a specic date (the expiration date). In order to obtain this
right, the holder must pay a premium to the buyer. The buyer has the
obligation to purchase a specic quantity of the underlying asset at
the strike price indicated, if the writer (holder) exercises his right.
Against this obligation, the writer receives the premium paid by the
buyer.
Before deciding to invest in a particular security, you should understand
the risks. An investment advisor or nancial planner can provide you with
more information to help determine your risk-tolerance level.
Risk is the possibility that you could lose some, all, or more than your
principal investment, or that you could earn less return from the investment
than you expected. Lower risk investments include government T-bills
and Canada Savings Bonds. At the higher end of the risk spectrum are
investments such as futures and shares of junior venture companies.
Bonds, equities, ETFs and mutual funds have a wide range of risk proles.
Expected Return refers to the amount of interest, dividends or capital
gains that you expect to receive from your investment. (Actual returns
may, of course, be quite different.) As noted before, there is a direct
correlation between expected return and risk, that being the higher
the expected return, the greater the risk.
Marketability (or liquidity) refers to whether you can sell or redeem your
investment quickly at or near the current market price. Term deposits are
an example of an illiquid investment, since you generally cant withdraw
your money before the end of the term without paying a signicant penalty.
Many other investments, such as mutual funds or listed securities, are very
marketable because they can be quickly sold or redeemed on short notice
and at low cost. Marketability is an important factor to be considered when
selecting your investments.
For more information on the basics of investing, visit the Investor
education Funds website www.investorED.ca
Derivatives
Characteristics
of Investing
11 10
In order to begin trading, investors need
to open an account with a brokerage
rm. A brokerage rm is a registered
dealer who buys and sells securities
from their own inventory. The term
broker and dealer are interchangeable.
Setting Objectives
Before investing, you should think about how each investment you
make will affect your other nancial goals and decisions. Professional
advisors and nancial planners can help you better examine your
knowledge of nancial markets, your nancial assets, your tolerance
for risk, the amount of money you have to invest, and your
investment goals and aims.
Asking questions is part of taking a big-picture approach to all of your
nancial decisions. A big-picture approach will help you determine
your goals and how long it may take to reach those goals. And it will
also encourage you to consider the consequences of your investment
decisions. These decisions should be made within the context of
a nancial plan that is revisited regularly. When in doubt about your
nances or investing, it is a good idea to get professional advice.
Qualied nancial planners consider their clients goals, stage
in life, personal circumstances and risk tolerance. They make
recommendations for growing and preserving wealth, minimizing
tax, estate planning, insurance and more. In some cases, these
same planning professionals will be involved in executing the
recommendations they make (e.g. selling specic investment
products). In other cases, these transactions will be executed
separately with other professionals. It is this big-picture approach
to meeting nancial goals that sets planners apart from all other
nancial advisors.
There are many designations that distinguish the various services
nancial professionals are qualied to deliver. For example, for
nancial planning the CFP or Certied Financial Planner
designation ensures a professional who has met the highest
standards in education, examination, experience and ethics
relating to nancial planning.
Finding the right nancial planner to serve your particular
needs will take some legwork and investigation. Interview
more than one advisor or planner and talk to other
investors for possible references.
For more information on nancial planning and how to
nd help, visit the Financial Planners Standards Council
website at www.cfp-ca.org
Investing Concepts
13 12
There are two types of brokerage rms: Discount and Full-service.
Investors who are comfortable with making their own trading
decisions may choose a Discount Broker. A discount broker
typically charges less commission, but does not offer investment
advice. Full-service Brokers charge more commission, but
provide investment advice, analyze nancial reports, and publish
research on companies.Commissions vary depending on the broker
and the value of the trade but are normally charged as a percentage
of the trade.
Before you place an order, there are several decisions to make. You
must decide which security or securities you want to purchase based
on your investment objectives. There are three basic categories of
investment products or assets: equity investments, debt investments,
and cash or cash equivalents. The combination of these three types
of products in a portfolio is called the asset mix. The asset mix you
choose will be important in establishing the overall risk and the
expected returns.
The number of shares or units you purchase will depend on how
much money you are willing to spend. Shares are normally, but not
necessarily, purchased in board lots. (For example, shares trading
over $1.00 are sold in a board lot of 100 shares.) An equity options
contract also represents a board lot of the underlying equity. Units,
such as mutual funds or trust units, are associated with a certain
dollar amount, depending on the investment. Investors will want
to consider the maximum price they are willing to pay, and take into
account the current market price.
Next, you will have to decide what type of order to
place. For an equity order, you have choices such as:
Day Order only valid for the day the order was
placed with your broker.
At-the-Market Order species a number of
shares to be bought or sold at the best available
price at the time of the trade.
Limit Order allows you to buy or sell a specic
stock at a specied maximum or minimum price.
Stop Loss an order placed to buy or sell a specic
number of shares, at a specic price (or better) after a
given stop price has been reached or passed.
There are two basic types of trading accounts: cash accounts and
margin accounts.
A Cash Account is a basic account through which an investor
can buy and sell securities. When an investor initiates a trade,
the investor is expected to make full payment on or before the
settlement date, which is generally three business days after
the transaction date.
A Margin Account utilizes a line of credit granted by the
brokerage rm. Investors can leverage the investment, using
borrowed funds by paying only part of the investment up front,
the balance being paid by the brokerage rm. In margin
accounts, the shares are held by the broker as collateral for the
loan. To trade derivative products, such as equity options,
investors need a separate account.
First, decide if you want a discount broker or a full-service broker;
there is plenty of choice for each category in Canada. If you want
to nd an individual investment advisor with whom to develop your
portfolio, you could speak to friends or family who have experience
working with brokers, or you could contact individual brokerage
rms. If you are using a nancial planner, he or she should be able
to recommend one.
To be registered to sell securities in Canada, brokers must have
passed:
The Canadian Securities Course;
An exam on rules and regulations, conduct and ethics;
A brokerage rm training course;
An advanced course in nancial planning within two and
a half years of being licensed.
To trade equity options and other derivative products, brokers must
also meet further specic requirements.
Opening an Account
How to Find
a Broker
15 14
Newspapers
Each security trading on Toronto Stock Exchange, TSX Venture
Exchange, the Montreal Exchange and Over-the-Counter has a one
to three letter symbol that identies it to the public. The nancial
section of any newspaper will contain up to date information on most
securities. Information such as closing prices, intra-day high and low
prices, and interest and exchange rates are available on a variety of
securities, including equities, options, mutual funds, ETFs, and trust
units. Other information is also available on nancial websites such
as www.tsx.com and www.me.org
On-line Research
The Internet can be an invaluable tool for investors and
offers a wealth of information about nancial markets and
personal investing.
Investors who venture into the on-line world, however,
should keep in mind that the power of the internet is also
being exploited by investment con artists. Regulators in
Canada and the United States have mounted important
new programs to stop cyber-fraud, but there are still many
places on the internet for crooks to set up shop.
The law in Canada requires that people in the business of
trading or advising in securities be registered (licensed) in
each province and territory in which they do business.
Evaluate the information found on-line in the same way as
a hot tip from a stranger. Exercise healthy skepticism
and remember how easy it is for people to disguise their
identity on-line. Keep in mind that investment schemers
will often talk up projects in remote corners of the globe
that cant be easily checked out, or use endless technical
jargon that can only be understood by experts.
Securities regulations designed to protect investors from
fraud and abuse do apply in cyberspace. The failure of
companies, dealers or advisors to comply with regulations
is often a red ag highlighting a potential investment scam.
Contact securities regulators in the province in which you
live to check if an individual or company is registered to
trade or offer advice and in which jurisdictions.
Annual Reports
A companys nancial tness is the most important thing to consider. There
are many places to nd nancial information: on-line, books, newspapers,
analyst and investment reports, and a companys annual report.
Annual reports are valuable sources of information that can help people make
more informed investment decisions. In addition to a companys website,
prospectus, and continuous disclosure documents, the annual report (and
quarterly reports) offers investors the most comprehensive picture of a
companys nancial status, describing the companys current activities,
future opportunities and how it is performing compared to its competitors.
The rst step in making sense of an annual report is to understand the major
sections and what kind of information to expect from each. An annual report
will contain an overview of the business, nancial highlights, and a
management discussion and analysis (MD&A).
Financial statements are an essential part of an annual report. The principal
components of the nancial statements are: the balance sheet; income
statement; statement of changes in shareholders equity; statement of cash
ows; and footnotes:
The balance sheet portrays the nancial strength of the company by
showing what the company owns and what it owes on a certain date.
It can be thought of as a snapshot since it states a nancial position as
at the end of the statement period;
The income statement, on the other hand, is like an entire movie since
it reports on how the company performed during the period and shows
whether operations have resulted in a prot or loss;
The statement of changes in shareholders equity reconciles the
activity in the equity section of the balance sheet from period to period.
Changes in equity are commonly the result of company prots or
losses, dividends, or stock issuances;
The statement of cash ows reports on the movement of cash by the
company for the reporting period;
The footnotes provide more detailed information on the balance sheet
and income statement.
Financial Information
and How to Read It
17 16
Before making a trade, nd out the current price of the security.
For equities, the bid price is the highest price someone is willing
to pay for a specic amount of shares. The ask price is the lowest
price at which someone is willing to sell their shares. A broker, or
a discount broker, will know current bid and ask prices prior to
placing the order.
Placing an Order
Step 1: Contact the broker either discount or full-service
and place an order for shares.
Step 2: Buy and sell orders are matched electronically by the
exchanges computer system.
Step 3: When a match is found, the broker executes the trade
at the specied price and charges a commission. Investors have
three business days to pay for the transaction.
All equity trading is monitored by trained
Market Regulation Services Inc. staff
(www.regulationservices.com) (see Investor
Protection section) to ensure the market is
fair for all investors. TSX Group (tsx.com)
also supplies up-to-date market information
to retail and institutional investors.
investor
protection
Making the Trade
19 18
All equity trading activity in Canada is monitored by Market Regulation
Services Inc (RS). RS was created as a joint initiative of TSX Group and the
Investment Dealers Association of Canada (IDA). The mandate of RS is to
foster investor condence in the Canadian capital markets and to safeguard
investor protection through the administration, interpretation and enforcement
of a common set of equity trading rules consistently in all markets in Canada.
The Regulation Division of the Montreal Exchange monitors trading activity
in the derivatives market. The Regulation Division was created to ensure
separation of the for-prot activities of the Montreal Exchange and its role
as a self-regulatory organization (SRO).
The IDA is the Canadian investment industrys national trade association and
largest SRO. One of the primary functions of the IDA is to regulate the
conduct of member rms; for example, ensuring that brokers deal fairly with
their clients. The IDA, in partnership with the Canadian Banking Ombudsman
(CBO), the Investment Funds Institute of Canada (IFIC), and the Mutual Fund
Dealers Association of Canada (MFDA), operates the Ombudsman for
Banking Services and Investments (OBSI) where investors can call to ask
questions and register complaints about their dealings with brokers. The
Regulation Division of the Montreal Exchange plays a similar role relative to
the conduct of participant rms and can also receive, directly from clients,
requests for information or deal with any complaints they may have.
Each exchange has set minimum public distribution and listing requirements
to help provide a liquid market and maintain a level of market integrity. TSX
Group has contracted with RS to develop and enforce trading rules over and
above the rules administered by the Ontario Securities Commission and
actively promotes the protection of investors and the public interest.
In Canada, the regulation of securities markets is a provincial and
territorial responsibility. The Canadian Securities Administrators (CSA) is a
forum for the 13 securities regulators of Canadas provinces and territories
to coordinate and harmonize regulation of the Canadian capital markets.
Provincial and territorial securities legislation sets out the rules and
regulations for the securities industry. The purpose of these regulations
is to provide protection for investors from unfair, improper or fraudulent
practices; foster fair and efcient capitals markets; and promote
condence in the marketplace.
These goals are achieved by:
mandating full disclosure of information and material important to
investment decisions;
educating investors about the risks and responsibilities of investing;
authorizing persons who provide investment services to the public
and supervising market intermediaries;
ensuring investors have fair access to market facilities and market
price information through regulation that can detect, deter and
penalize market manipulation and unfair trading practices;
reducing the risk of failure of market intermediaries, and, when it
cannot be avoided, seeking to reduce the impact on investors and
other market participants;
ensuring market intermediaries are competent, trustworthy and
nancially sound.
For a listing of securities administrators in Canada,
visit the CSAs website www.csa-acvm.ca
One of the ways that the industry ensures a level playing eld for
all investors is through disclosure standards. A Listed Company
is required to inform the public if there has been any signicant,
material change in its affairs that could affect the market value
of its stock. Typically, companies do this through a press release
issued on national newswires. This disclosure helps ensure that all
investors have access to new information in a timely manner.
Company information can also be found on SEDAR (System for
Electronic Document Analysis and Retrieval), an online database
of documents led with securities regulators which provides
information on all publicly traded companies in Canada. SEDAR
proles more than 6500 companies and mutual funds and is
available free of charge to the public at www.sedar.com
Who are
the Regulators?
Disclosure Standards
21 20
Auction Market: A market where
buyers and sellers are brought together
to trade with each other and prices are
set by supply and demand. Toronto
Stock Exchange and TSX Venture
Exchange are examples of auction
markets.
Arbitrage: The simultaneous purchase
of a security on one exchange and sale
of the same security or an equivalent of
that security on the same or another
exchange which can result in a prot.
Assets: Everything a company or
person owns or is owed, such as money,
securities, equipment and buildings.
Assets can be intangible (goodwill) or
tangible (physical).
Ask Price: The lowest price anyone will
accept to sell a stock.
At-the-Market Order: An order to buy
or sell stock immediately at the best
price available.
Bear Market: A market in which stock
prices are falling.
Bid Price: The highest price anyone
will pay to buy a stock.
Blue Chip Shares: A security issued
by a well-established, nancially-sound,
and stable company that has
demonstrated its ability to pay
dividends.
Board Lot: A regular trading unit. The
board lot size of a stock on Toronto
Stock Exchange and TSX Venture
Exchange could be 1000, 500, or 100
shares, depending on the price of the
stock. For stocks trading at over $1.00
in value, the board lot is 100 shares.
Generally, an investor buying or selling a
board lot pays less commission than an
investor buying or selling an odd lot an
amount not equal to a board lot.
Bond: A loan of funds to an
organization seeking capital. The
investor becomes a creditor to the
issuer, and has a higher claim to assets
than a shareholder.
Broker/Dealer: An individual or rm in
the business of buying and selling
securities on behalf of clients,
sometimes operating as a broker and a
dealer, depending on the transaction.
Bull Market: A market in which stock
prices are rising.
Call: An option that gives the holder the
right, but not the obligation, to buy a
specied amount of a certain stock at a
specied price within a specied time.
Capital: Money, assets, securities,
and inventory.
Capital Market: A market that brings
together users and providers of capital.
Commission: The fee charged by
investment brokers for trades done on
behalf of clients.
Common Shares: Securities that
represent part ownership in a company
and generally carry voting privileges.
Day Order: An order that is valid only
for the day it is entered.
Dealer Market: A securities market
in which transactions are between
principals acting as dealers for their own
accounts rather than between brokers
acting as dealers for buyers and sellers.
Debenture: An unsecured debt security
representing a claim to the assets of the
borrowing institution, backed only by the
credit worthiness of that institution.
Derivative: A nancial instrument
whose value is a function of the price
of another asset.
Dividend: A payment, either in the form
of cash or stock, made to the owner of a
stock by the issuer of the stock.
Equities: Common and preferred
shares, which represent a share in the
ownership of a company.
Exchange Traded Funds (ETFs):
Investment products that allow an
investor to buy an entire basket of
stocks through a single security which
tracks and matches the returns of a
stock market index.
Expected Return: The total prot
expected from an investment. Returns
may be in the form of income, interest,
dividends, or as capital gains.
Future: A nancial contract, or
agreement, to buy or sell nancial
instruments or physical commodities for
future delivery.
Going Public: The process of selling
shares to the public. When a company
"goes public," it is the rst time the
general public has the ability to buy
shares. Otherwise known as an initial
public offering (IPO).
Growth Shares: Shares in a company
whose earnings are expected to grow at
an above average rate relative to the
market. A growth stock usually has a
high P/E ratio and does not have a track
record of paying a dividend.
Hedge: A trade designed to reduce risk
arising from another position held by the
investor.
High Risk Security: Shares issued by
newly formed companies and/or those
without a proven nancial track record.
Index: A statistical compilation that
represents the current market value of a
group of securities.
Initial Public Offering (IPO): A
companys rst issue of shares to the
general public.
Insider: A director or senior ofcer
of a company, its parent and
subsidiaries, and anyone owning
more than 10 percent of the voting
shares in a company.
Insider Trading: Legal insider trading
occurs when stock transactions are
made by insiders of a company and
reported to the appropriate securities
commissions. Illegal insider trading
occurs when trades are made by anyone
with knowledge of material information
that is not public knowledge.
Leverage: Seeking magnied returns
on an investment by using borrowed
funds or margin accounts.
Limit Order: An order to buy or sell
stock at a specied price.
Market Capitalization: A measure of
a companys size based on the total
dollar value of all outstanding shares. It
is calculated by multiplying the number
of shares times the current market price.
This term is often referred to as market
cap.
Market Maker: A registered trader
who provides continuous bid and ask
prices in order to maintain liquidity for a
particular equity or derivative instrument.
Material Change: A change in a
companys affairs that is expected to
have a signicant effect on the market
value of its securities.
Minimum Guaranteed Fill (MGF):
Registered traders guarantee a complete
ll of orders placed by investors in most
stocks (up to a certain amount of shares)
at the current market price.
Money Market: The securities market
dealing in short-term debt and monetary
instruments. Money market instruments
are forms of debt that mature in less
than one year and are very liquid.
Option: A nancial contract sold by one
party to another that offers the buyer the
right, but not the obligation, to buy (call)
or sell (put) a security at an agreed-upon
price during a certain period of time or
on a specic date.
Over-the-Counter (OTC): Shares not
listed on an exchange may trade on the
OTC, or Over-the-Counter market. OTC
trades are mainly conducted over the
phone directly between two parties.
glossary
22 23 22
Participating Organizations:
Investment dealers (companies) who are
granted access to trade on a particular
stock exchange.
Penny Shares: A stock that sells for
less than $1 a share, rarely offers
dividends, and is usually issued by
newly formed companies. Penny shares
present a much higher degree of risk
than growth or blue chip stocks.
Preferred Shares: Shares that may
carry dividends that must be paid before
any dividends are paid to common
shareholders. These generally do not
come with voting rights.
Primary Market: The market in which
investors have the rst opportunity to
buy a newly issued security.
Put: An option which gives the holder
the right, but not the obligation, to sell
a xed amount of a certain stock at a
specied price within a specied time.
Registered Representative (Trader):
An individual employed by an investment
dealer who provides investment advice
to clients and executes trades on their
behalf.
Right: A privilege granted to a
companys existing common
shareholders to acquire additional
common shares directly from the
company at a stated price.
Risk: The chance that an investment's
actual return will be different than
expected. This includes the possibility of
losing some or all of the original
investment.
Risk Tolerance: An investors ability
to accept the possibility of losing capital.
Secondary Market: The market in
which the buying and selling is done
between retail and institutional investors.
Shares on this market have by denition
already gone through the Primary Market
for Initial Public Offerings (IPO).
Self-Regulatory Organization (SRO):
An organization that mandates the
enforcement of fair, ethical and efcient
practices in the securities industry.
Short Selling: The sale of a security
which the seller does not own.
Small Cap: Companies that have
smaller market capitalization, typically
are less established, often faster growing
and usually more volatile.
Stop Limit Order: An order placed
with a broker to buy or sell at a specied
price (or better) after a given stop price
has been reached or passed.
Stop Loss Order: An order placed
with a broker to buy or sell when a
certain price is reached. It is designed to
limit an investor's loss (or lock in prot)
on a security position. This is sometimes
called a stop market order.
Strike Price: Also known as the
exercise price. It is the price at which
the underlying asset may be purchased
(for a call option) or sold (for a put
option).
Ticker: An electronic record of trading
activity.
Trust Unit: Trust units represent
interests in the net assets and net
income of trust companies. These trusts
are generally set up to invest in assets
such as real property (real estate
investment trusts), royalties from oil and
gas production (royalty trusts) or the
income generated by one or more
businesses (income trusts). Many are
designed to offer tax advantages to
investors.
Warrant: A privilege giving the
holder the right to purchase securities
at a stipulated price within a specied
time limit.
Writing an Option: Selling an option.
Yield: The return provided by an
instrument over a certain period.
The Derivatives Institute
The Derivatives Institute is a fully integrated educational service created
by the Montreal Exchange in April 2001 to provide investors with the
training necessary to understand and use derivative instruments.
The Institutes mission is to inform, educate and provide specialized
training to the general public and nance professionals on the use and
value of derivatives in portfolio and risk management.
The Institute offers a full range of high-quality courses, workshops and
seminars, both in class and online. The courses use interactive teaching
methods to provide practical and useful education in a stimulating and
engaging environment. Courses are available at all levels, ranging from
introductory to advanced.
The Derivatives Institute also provides organizations with custom
in-house training on a variety of topics such as derivative instruments,
risk management, technical analysis, and portfolio management.
More information can be found at www.derivatives-institute.com
Financial Planners Standards Council (FPSC)
Incorporated on November 10, 1995 as a not-for-prot organization, FPSC
benets the public and the nancial planning profession by establishing and
enforcing uniform professional standards for nancial planners who choose
to earn the internationally recognized CFP

designation. These standards

include requirements in areas of education, examination, experience and
ethics, known collectively as the 4Es of professionalism.
FPSC was formed on the initiative of organizations whose members deal with
the personal nances of individuals. It continues to be supported by: Advocis
(The Canadian Association of Financial Planners and Canadian Association
of Insurance and Financial Advisors); The Canadian Institute of Chartered
Accountants; The Canadian Institute of Financial Planning; Certied General
Accountants Association of Canada; Certied Management Accountants of
Canada; and Credit Union Institute of Canada. For more information on
nancial planning and how to nd help visit the Financial Planners
Standards Council website at www.cfp-ca.org
The creation of this document would not be possible without
the generous support of the following organizations:
About
the Sponsors
glossary continued
24 25
Investor education Fund
The Investor education Fund was established by the
Ontario Securities Commission (OSC) in 2000 to develop
and support initiatives that educate investors.
These initiatives range from programs that introduce young
children to the concepts of savings and personal nance
right through to initiatives dealing with the markets, market
regulation, investing and retirement planning for adults.
The Investor education Fund is dedicated to providing
investors with easy-to-use, relevant and reliable nancial
information. Its website, www.investorED.ca, offers
unbiased nancial information consumers can trust.
Canadian Foundation for Investor Education
The Canadian Foundation for Investor Education is a national, educational
charitable organization dedicated to increasing interest, knowledge and
understanding of issues important to Canadian investors and capital markets.
The Foundation seeks to create a forum for the exchange of ideas and
information, bringing together experts, practitioners and the investing public
to develop a dialogue that will assist investors distill greater meaning from
these issues. CFIE also seeks to advance the education of investors and others
interested in Canadas capital markets through direct dialogue, informed
debate, publications, select educational grants, and commissioned research.
The achievement of this ambition will ensure that Canadian investors have
the information they need to be informed, condent participants in
Canadas capital markets.
For more information and resources, visit www.CFIE.ca